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Different Cost of Capital with Changed Proportions: It is quite possible that the specific costs of capital of different sources may be affected by the amount of funds' raised and the proportion of a particular source may also change as a result of new funds. Consequently, the WMCC may also change and vary differently. For example, following is the capital structure of firm:
Now suppose, the firm has an investment proposal of Rs. 10,00,000 and expect to generate retained earnings of Rs. 2,00,000 from the current operations. The remaining funds are raised by the issue of Equity share capital (Rs. 6,00,000 at 12%) and 12% Bonds (Rs. 2,00,000). The WMCC of the firm can now be ascertained as follows:
WMCC =.6 (.12) +.2 (.11) +.2 (.06) = .106 or 10.6%.
The WACC of the firm can now be calculated as follows:
Source
Amount (Rs.)
Weight
C/C
Weight )( C/C
Equity share capital
25,00,000
.417
.11
.0458
6,00,000
.100
.12
.0120
Retained earnings
12,50,000
.208
.105
.0228
2,00,000
.033
.0036
11 % Debentures
.209
.055
.0115
12% Debentures
.060
.0020
60,00,000
1.000
.0977
The WACC of the firm is .0977 or 9.77%. So, the WACC has increased from 9.6% to 9.77% as a result of WMCC of 10.6% (which was higher than the then WACe). So, the WMCC has lifted the WACC.
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